This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

October 16, 2013

NFL, Concussions and Brokers: The Dangers of Denial

I was just reading about a new book called “League of Denial,” which was the basis of a two-hour PBS Frontline documentary which aired Oct. 8. The book was written by ESPN reporters Mark Fainaru-Wada and Steve Fainaru, about the NFL’s handling—or lack of same—of the rising incidence of health problems in players and former players resulting from repeated concussions.

I haven’t read the book, and haven’t decided whether I will: it would probably end my days of watching pro football, and I’m just not sure I’m ready for that, yet. However, from Amazon’s promotional description of the book, as well as the reader reviews, the NFL’s repeated denials of concussion-related problems in its players are strikingly similar to the securities industry’s current stance on its responsibilities to its investor clients.

“Professional football players do not sustain frequent repetitive blows to the brain on a regular basis,” concluded a 2005 NFL sponsored “scientific” paper, as reported by the Fainaru brothers. Hard to believe, right? It was statements like this, which would render incredulous any second-grader who watched an NFL game for more than five minutes, to finally settle a class action suit with 4,500 former players over the payment of benefits for concussion-related illnesses.

That’s right: even harder to believe is that the NFL was denying medical benefits to players suffering from the aftermath of years of repeated concussions, such as dementia, brain damage, paralysis and even, eventually, death. What’s more, the settlement amount of $765 million works out to only $170,000 per player, and that’s before deducting legal fees. Many former players have already run up medical bills in excess of that figure, which have not been covered by the league.

“League of Denial” purports to show “how the NFL, over a period of nearly two decades, sought to cover up and deny mounting evidence of the connection between football and brain damage.” That mounting evidence includes independent neuro-scientific studies that show “no amount of padding could protect the human brain from the force generated by modern football.”

Now before I get a bunch of angry comments, yes, I’m well aware that football players assume the risk of their profession. Football is violent and dangerous and nobody knows that better than the players themselves. But what the players may not have known are the long-term consequences of their injuries. And if, as the Fainarus claim to show, the NFL did know it, and not only didn’t share the knowledge with its players (read: employees, here), and worse denied them benefits for treatment to cover up the truth, I think most us would think there was a serious wrong committed.

The parallels here to the securities industry, at least to my mind, are pretty obvious. Instead of the employees being kept in the dark (although I suspect some of them are), it is the brokerage clients who don’t understand how the game is really played. Not only are financial markets and investment vehicles complex subjects (and in the case of some derivatives actually “rocket science”) that take years of education and experience to master, but study after study has shown that most investors are under the delusion that their brokers have a legal duty to act in their best interests.

I’m really not trying to cast aspersions here. In fairness, the brokerage industry grew up in a world where most clients were wealthy, and therefore at least presumed to be financially sophisticated, and investments were largely straightforward. (Not unlike football when they wore leather helmets, and before steroids.) But the world has changed since then, for both football and investing. Today, most investors are middle-class and financially unsophisticated—and therefore in need of professionals who are on their side of the table, to help them manage their finances.

Like the NFL, it’s time for the securities industry to grow up: to face the realities of their industry and the needs of today’s financial consumer. SIFMA is right that the issue today is about business models. But “business model neutrality” is not the solution: the brokerage model of retail securities sales is outdated, a thing of the past. And the brokerage firms know it: we see them wrestling with how to provide advice, yet still clinging to the conflicts of commissions, proprietary products, principal trading and controlled arbitration. (Just as the NFL has changed its rules to limit helmet-to-helmet contact.)

I don’t know what the solution is for the NFL: large, soft Stay-Puft marshmallow-like helmets? Touch football?

The future of Wall Street is more clear (at least to me): Independent RIA firms that act as gatekeepers between their clients and financial product manufacturers. And the brokerage firms who accept this new model soonest will be those that survive.